Bloomberg reports that the U.S. Securities and Exchange Commission is probing JPMorgan’s belated May 10 disclosure that a change to its mathematical model for gauging trading risk helped fuel the loss in its chief investment office. While the SEC would have to prove that the biggest U.S. bank improperly kept important information from investors, regulators probably will press Wall Street firms to tell more about the risks they’re taking, three former SEC lawyers said.
'The SEC and investors are learning that apparently the compliance folks and financial folks at very senior levels at JPMorgan do not think it’s important to share really significant modeling changes', said Elizabeth Nowicki, a former attorney in the SEC general counsel’s office who’s now an associate law professor at Tulane University in New Orleans.
So far, New York-based JPMorgan has added a warning in its most recent quarterly report that risk models are continually tweaked to account for 'improvements' in modeling techniques, and the head of the SEC has publicly asserted that banks should disclose significant changes and the reasons.
The dispute revolves around value-at-risk, the main and sometimes only empirical gauge that investors get as they try to fathom how much a bank could lose if its trading bets go bad. Wall Street firms routinely give only broad outlines of how their mathematicians calculate VaR, according to data compiled by Bloomberg, and almost nothing about changes in statistical assumptions or the prices they choose to feed into their models.
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